PERSPECTIVES OF INFLATION TARGETING, IN THE CURRENT ECONOMIC CONTEXT

• Main Author: COROIU SORINA IOANA
• Format: Article
• Language: English
• Published: Academica Brâncuşi 2015-04-01
• Series: Analele Universităţii Constantin Brâncuşi din Târgu Jiu : Seria Economie
• Subjects: Monetary policy; Inflation targeting; Liquidity trap; Financial stability.
• Online Access: http://www.utgjiu.ro/revista/ec/pdf/2015-02/41_Coroiu.pdf

In the context of economic crisis, monetary policy makers are facing a number of challenges, including the selection and implementation of the best monetary policy. In this paper, we want to see if inflation targeting is or is not a solution to exit the economic crisis. If the answer is positive, then what would be the optimal level of inflation? Many central banks target an inflation rate of 2%. In this paper we intend to show that, in certain circumstances, a very low level of inflation can significantly reduce the stabilizing effects of monetary policy. A slightly higher value of inflation targeting would reduce the constraints on monetary policy, caused by the appearance of liquidity trap. The risk for the interest rates of monetary policy to achieve zero level is related to the central banks’ choise of the appropriate inflation target. We believe that an increase in the inflation target of 2% to 4% would ease monetary policy constraints arising from the liquidity trap problem. If inflation targeting is not a solution to exit the crisis, then are there other strategies that would be a better alternative? Following this analysis, no obvious alternatives were identified, so far, there is no clear reason for that to abandon inflation targeting.